CORPORATE FINANCE HANDOUTS

Transcription

1 CORPORATE FINANCE HANDOUTS MBA COMPULSORY SUBJECT ZAGREB, SEPTEMBER 4 8, 2006 EDUCATOR: DR. LÁSZLÓ KÁRPÁTI UNIVERSITY OF DEBRECEN Centre of Agricultural Sciences Faculty Of Agricultural Economics and Rural Development DEPARTMENT OF MARKETING AND BUSINESS 4032 Debrecen, Hungary Böszörményi út 128. Tel/Fax.: karpati@agr.unideb.hu TEXTBOOK: Brealey Myers Allen: Corporate Finance. Eight edition Mc. Graw Hill International Edition, New York 2006 CONTENT: 2 sessions/day* 5 days = 10 sessions 4 in class testing and evaluation 4 homework assignment/team and in-class team presentation/team EXAMINATION : 2 hours written test in November, 2006

2 CORPORATE FINANCE Guidelines Main objective: Gives knowledge about formation a company in order to achieve the maximum shareholder s value on medium and long-run. (maximum shareholder s value increased equity) Viewpoint: from the owner(s) of a (manufacturing) company through the eyes both the CEO and the financial manager. Method: the changes of wealth of the owner can be followed on the balancesheet. Essential tool: the methods applied in corporate finance are useful for supporting any other decision-making tasks in the company. 2

3 SESSION 1 Timing: September 4, Monday, a.m. Objectives: (to acquire knowledge in connection of the topics) 1. The Scope of Corporate Finance 2. The Financial Manager 3. Time Value of Money Resources: 1. Handout from László Kárpáti, subject educator 2. Textbook: Brealey Myers Allen: Corporate Finance. Eight edition McGraw Hill International Edition, New York 2006 (further: Book) Chapters covered: Ch.1, Ch. 2.1, Ch. 2.2, Ch Student CD-ROM of the Book (further: CD). Topics covered: CD PowerPoint presentations in connection with: Ch. 1., Ch. 2.1, Ch 2.2 Ch. 2.3 Test: No Homework: No 3

4 Basic Strategy of Creating a Successful Company by Financial Decisons 1 Increasing the income from assets 2 Decreasing the cost of capital 3 Maximizing the net cashflow 7 and further increase the income 6 Increase the assets L E 5 Get new debt financing 4 Reinvest in equity Assets Equity + Liabilities 8 Repeat the cycle as quickly as possible 4

5 Future? (31) MAIN DECISION-MAKING STEPS IN CORPORATE FINANCE RISK? (30) 1 Fixed Assets Net Value (2) Real Estates (4) Financial Assets (6) Inventory (15) Machinery (5) Appreciating Unchanged Total Long-term bonds (7) Shares (8) Total Other Fixed Assets (9) Fixed Assets Total Raw Material (16) Work-in-Progress (17) Finished Goods (18) Total Liabilities Short- Term Liabilities Long- Term Liabilities Financial Liabilities (26) Account Payable (Creditors) Wages/Salaries/ Other Accured Expenses (24) Current Taxation (25) Bank Overdraft (27) Short-term Loan (28) Inventory Financing (29) Other short-term papers Total: Short-term Liabilities Total (23) Long-term Bonds (Debentures) /Loans (22) New Bond Issue (21) Total Total Liabilities Real Estate Appreciation Current Assets (3) Account receivable (Debtors) (13) Financial Assets Short-term papers Cash (12) Total Other current assets Current assets total 14 Equity New Share Issue (21) Retained Earnings (20) From Income Statement (20) Other Items Share Premium Share capital (19) Equity total ASSETS LIABILITIES+EQUITY (The Scope of the Corporate Finance) 5

6 REQIREMENTS IN CONNECTION WITH THE MAIN DECISION-MAKING STEPS STEP QUESTION REQIREMENTS/SUGGESTIONS 6

7 SESSION 2 Timing: Objectives: September 4, Monday, a.m. 1. Net Present Value 2. Annuity and Perpetuity 3. Compound Interest 4. Nominal and Real Rates Resources: Objective1: Book Ch. 3.1 Objective 2: Book Ch Objective 3: Book Ch Objective 4: Book Ch Objective 1-4: CD presentation Ch Test: Homework: In-class CD test/team, Ch.1, Ch.2. and Ch.3. In-class evaluation Phone Company Investment Evaluation. Analysis for teams is based on the handout ant of the educator (PowerPoint Figures) Objective 1: Chapter 3.1. p (5 pages) Figures: Ch Objective 2: Chapter 3.2. p: (5 pages) Figures: Ch Objective 3: Chapter 3.3. p (5 pages) Figures: Ch Objective 4: Chapter 3.4. p: (2 pages) Figures: Ch Total pages: 17 pages Total figures: 30 figures 7

8 HOMEWORK 1 PHONE COMPANY INVESTMENT EVALUATION Two Hungarian companies: A and B recognised the importance of the new generation mobile communicators and independently from each-other decided to invest in the development. Investment last for 1 year costs 800 Million HUF in both cares and guarantees the production for 5 years. The expected results of firm A can be seen in the Table below: Year Sold piece Sales million HUF Total: Cash costs million HUF Net cash flow million HUF The results of firm B is, as below: Year Sold piece Sales million HUF Total: Cash costs million HUF Net cash flow million HUF The discount rate applied consists of: - base rate: 6 % - time premium: 1 % - risk premium, consists of: - country risk: 6 % - industry risk: 7 % - no individual risk difference is calculated Questions: 1. What are the respective NPV-s? 2. What is the key of success for the company X? 3. What is the reason of failure for the company Y? 4. What should be done to remove the failure factor(s)? 8

9 SESSION 3 Timing: September 5, Tuesday, a.m. Objectives: Resources: Test: Homework: 1. Discussion of the homework by teams 2. Internal Rate of Return 3. Bond Valuation 4. Stock Valuation Objective 1: educator s evaluation based on the teams presentation Objective 2: Book Ch Objective 3: Book Ch Objective 4: Book Ch. 4.2., Ch Objective 2-4: CD presentations, Ch , Ch No No (PowerPoint figures) Objective 1: Educator s Handout Objective 2: Ch p (9 pages) Figures: Ch.5.: 1-20 Objective 3: Ch p (4 pages) Figures: Ch.4.: 1 6 Objective 4: Ch p: (2 pages) Ch p: (5 pages) Figures: Ch.4.: 7 26 Total pages: Total figures: 20 pages 46 figures 9

10 SESSION 4 Timing: September 5, Tuesday, a.m. Objectives: 1. Risk Management 2. Portfolio Risk 3. Capital Assets Pricing Model 4. Arbitrage Pricing Theory Resources: Objective 1: Book Ch. 7.1., Ch Objective 2: Book Ch. 7.4., Ch Objective 3: Book Ch Objective 4: Book Ch Test: In-class CD test/team, Ch.4. and Ch.5. In-class evaluation Homework: Evaluation of Risk of an Investment. Analysis for the teams, based on handout of the educator. (PowerPoint figures) Objective 1: Ch p: (8 pages) Ch p: (10 pages) Figures: Ch Objective 2: Ch p: (5 pages) Ch p: (8 pages) Figures: Ch Ch , Objective 3: Ch p: (5 pages) Ch p: (6 pages) Figures: Ch Objective 4: Ch p: (8 pages) Figures: Ch Total pages: Total figures: 54 pages 43 figures 10

11 HOMEWORK 2 EVALUATION OF RISK OF AN INVESTMENT A 1 million EURO fund is expected to result in the following yields on money market, for 100 consecutive investments: in case of 25 events: 0 % in case of 50 events: 10 % in case of 25 events: 20 % Questions: 1. Calculate the expected yields for the whole investment period. 2. Calculate the risk by standard deviation. 3. Evaluate the risk of the investment period. 4. If the normal distribution can be accepted, what is the most probable range of yields in the majority of the cases? 11

12 SESSION 5 Timing: September 6, Wednesday, a.m. Objectives: 1. Discussion of the homework by teams 2. Cost of Equity 3. Cost of Debt 4. Cost of Financial Distress Resources: Objective 1: Educator s evaluation based on the teams presentation Objective 2: Book Ch. 9.2., Ch Objective 3: Book Ch Objective 4: Book Ch Test: No Homework: No (PowerPoint figures) Objective 1: Educator s handout Ch p: (4 pages) Objective 2: Ch p: (4 pages) Ch p: (7 pages) Figures: Ch. 9.: 1-16 Figures: Educator s handout Objective 3: Chapter p: Figure: Ch (2 pages) Objective 4: Chapter p (15 pages) Figure: Ch , Total pages: 32 pages Total figures: 28 figures 12

13 SESSION 5 ESTIMATING THE COST OF EQUITY CAPITAL, based on the Gordon Model The growing perpetuity formula is to be used: T E = DIV 1 + g, where Po T E = estimation of cost of the equity capital DIV 1 = dividend payment/share at the end of the year Po = present price of 1 share g = expected long-term growth of the company Estimation of g: DIV Basis 1: plowback ratio: 1 -, EPS where DIV = present dividend/share EPS = earnings per share EPS Basis 2: ROE =, book equity / share where ROE = return on equity EPS = earnings per share g = plowback ratio * ROE 13

14 Shareholders value and company value according to the dividend payout ratio (based on the FINOPT Software) (Starting equity = 400 MEuro, starting profit after taxation = 280 MEuro, company tax rate = 30 %, personal tax rate = 50 %) Dividend Discount rate = 10 % Discount rate 5 % Equity payout 5 years 10 years 5 years 10 years 5 10 ratio shareholders shareholders shareholders shareholders years years (%) value value value value

15 SESSION 6 Timing: September 6, Wednesday, a.m. Objectives: 1. Cost of Capital 2. EBIT/EPS Analysis Resources: Objective 1: Book Ch Objective 2: Book Ch Test: In-class CD test/team, Ch. 17 and Ch. 18 In-class evaluation Homework: EBIT/EPS Analysis, team assignment, based an the handout of the educator (PowerPoint figures) Objective 1: Ch , p , (5 pages) Figures: Ch Objective 2: Ch p (7 pages) Figures: Ch , 12, EBIT/EPS Analysis. Homework, Educator s handout (3 pages) Total pages: 15 pages Total figures: 27 figures 15

16 HOMEWORK 3 EBIT/EPS Analysis Let s suppose a company, where the equity only consists of common shares with 1 Euro par value. The company decides to carry out an investment for development purposes, in order to market a brand new product. The investment and the introduction of the product has already been decided, the cost is Euro. However, financing of this sum has not been decided yet. In this exercise we give advice for the company which financing plan should be chosen from the two alternatives below: 1. Development from own resources. In this case all the costs are covered from issuing new shares. According to the analysts the company can issue shares with 2 Euro/piece par value with high probability of success. 2. Development from debt. In this case the company issue long-term bonds to cover fully the cost of the investment. The interest rate according to the analysts must be 10 % annually, and in this case the bond can be marketed successfully. The expected EBIT of the development can be varied between and Euro annually. The corporate tax rate is 18 %. Please give advice for the company, based on EBIT/EPS analysis. For this reason, calculate: 1. EPS, as a function of EBIT (2 levels) in case of own financing. 2. EPS, as a function of EBIT (2 levels) in case of debt financing. 3. Please draw a graph based on the results above! 4. Formulate your advice based on the market situation! 16

17 SESSION 7 Timing: September 7, Thursday, a.m. Objectives: Resources: Test: 1. Discussion of the homework by teams 2. Long-term financing 3. Securities Objective 1. Educator s evaluation based on the teams presentation Objective 2. Handouts of the educator Objective 3. Book Ch No Homework: No (Powerpoint Figures) Objective 1: Educator s handouts Objective 2: Educator s handouts Figures: 14 Objective 3: Ch p Educator s handout. 1 figure (3 pages) Total pages: 3 Total figures: 15 17

18 SESSION 7 Handout 1. Objective 2: Long-term financing Overview of financing of a company Two main sources of financing 1. Ownership Sources 2. Debt Sources 2.1. Short term (less than 1 year to maturity) 2.2. Medium term (1 5 years) 2.3. Long-term (longer than 5 years) 3. How to utilise the different sources in financing 18

19 1. Ownership sources of Financing 1.1. Ordinary Shares - Par value - Share premium 1.2. Preference Shares - Fixed divided = quasi interest - Dividend is not a cost item - No voting rights - Special Preference shares: Redeemable P.S. limited life-span Convertible P.S changeable to ordinary Shares 1.3. Other paid in capital Owner s payment by agreement 1.4. Venture Capital Starting up business with special advantages for the venture capitalist 1.5. Business Expansion Schemes - Grant from Government/Agencies - Grant from the EU 19

20 1.6. Retained earnings - Basis: Income from operations (EBIT) interest paid - Taxation: Reduction by legal steps - Net in come after taxation - Divided policy: Pay or not pay Plowback ratio = share of net income after taxation which is not paid out, as a dividend Advantages disadvantages of a low high plowback ratio New Issue of Shares - Alternative to new bond issue, based on EBIT/EPS analysis - Advantages disadvantages - Ownership considerations 1.8. Real Estate Appreciation - No real financing - Cost of appreciation - Advantages of the appreciation 20

21 2. Debt Financing 2.1. Short-term financing Trade Credit - Associated with raw material and service orders - Credit or payment up to 180 days - Balance sheet: account payable - Free financing - Importance is important Accrued expenses - Wages/salaries - Social security - Public utility/telephone - Interest payment - Insurance payment, etc. - Useful, but relatively small items Current taxation - Company income tax - VAT - Local taxes, etc. - Useful, but relatively small items 21

22 Bank overdraft - Simple - Expensive - Relatively small amount Short-term loam - Based on negotiation with the bank - Higher amount and less expensive Inventory financing - Based on inventory, especially the finished goods of the company, as a collateral - Loans up to 80 percent in case of physical products - Loans up to nearly 100 per-cent in case of physical product with public warehousing and stock-exchange transaction Other short-term sources - Bill of Exchange B/E - Commercial Paper! Acceptance Credit or Bank Bill of Exchange! Factoring del credere agents! Letter of Credit L/C! Insurance Premium Loans! Owners credit 22

23 2.2. Medium-term Financing Medium-term Bond issue - As an alternative against ownership financing - Time and cost considerations Median-term Loans - As an alternative for Bond issue - Advantages disadvantages Operating leasing - To obtain the use of an asset without ever gaining title to it - Can be cancelled any time by the lessee - In dynamically changing business environment Financial leasing - Lesser maintaines ownership of the asset, the lessee regularly pays fee, as a cost - At the end of the leasing period the asset will be owned by the lessee - The lease cannot be cancelled - Lease or buy should be based on financial calculations Hire Purchase - Not frequent in business 23

24 2.3. Long-term Financing Long-term Bond issue - See Marketability is questioned Debentures - Long-term loan with specific maturity, interest and repayment provisions - Types: Unsecured Mortgage lender obtain a lien on real estate Guaranteed Convertible into common shares Subordinated/junior Business Expansion Schemes - See 1.5., but with loan repayment requirement only or by a very low interest rate Sale and Leaseback - Selling real estates to banks/financial institutions for cash and pay it back as a leasing - Advantages disadvantages 24

25 Project Financing - In case of long and costly development targets (motorway, bridge, tunnel, mining, etc.) - All the costs of the project is financed by a bank (consortium) - Management is carried out by the project initiators - High proportion of the net cash flow after operating the project goes to the lenders, as repayment - Shareholders can exercise their right and get dividend just after the full repayment of the loan 25

26 3. How to utilise the different sources in financing? Questions to be solved: what financial sources is to be used and for what purpose? 3.1. Conservative approach: asset life and financial source life must be similar, e.g: long-term assets should be financed by long-term resources Or - short term sources is to be used just to finance seasonal fluctuations. 3.2.New approach: financial resources must be used in an order of cost of capital, except own resources that should be used fully. In this approach short-term is considered as cheap financing. 3.3.The above strategies are illustrated as conservative, solid and aggressive financing strategies in the next 3 figures. Conservative financing strategy Financing Resources: Seasonal Fluctuation Short-term debt Cash Current Assets Increasement Fixed Assets Long-term debt Own sources Time Charasteristics Advantages - Disadvantages 26

27 Solid financing strategy Financing Resources: Seasonal Fluctuation Short-term debt Cash Current Assets Increasement Fixed Assets Long-term debt Own sources Time Charasteristics Advantages - Disadvantages (Very) Aggressive financing strategy Financing Resources: Seasonal Fluctuation Cash Current Assets Increasement Time Fixed Assets Charasteristics Short-term debt Long-term debt Own sources Advantages - Disadvantages Note: Not the life-span of a financial source is important, but the cost! 27

28 SESSION 7 -Handout 2. SECURITY AND SENIORITY Objective 3: SECURITY AND SENIORITY 1. Short-term unsecured issues: notes 2. Long-term issues: debentures Secured by: - mortgage (real property collateral) - equipment trust certificate (formal ownership of equipment) 3. Subordinated or junior bonds Recovery rates on securities: (USA ) Bank debt: 81.6 % Senior secured notes: 67.0 % Senior unsecured notes: 46.0 % Subordinated notes: % 28

29 SESSION 7 - Handout 3. Effect of own financing on the shareholder s value (Based on the FINOPT software, discount rate = 10%) Per cent of equity from the total capital employed 5 years shareholders value % of the starting year 10 years shareholders value % of the starting year 100% % % % % % % % % % % %

30 SESSION 8 Timing: September 7, Thursday, a.m. Objectives: 1. Valuing Business Financially 2. Valuing Business: Other Methods Resources: Objective 1: Book Ch Objective 2: Handouts of the educator Test: In-class CD-test/team, Ch. 19 and Ch. 25 In-class evaluation Homework: Rio Corporation evaluation, Book Ch , and CD Excel file, based on different scenarios specified by the educator for the teams (PowerPoint figures) Objective 1: Chapter p (6 pages) Figure Ch. 19. : Objective 2: Educator s handout (2 figures) Total pages: 6 pages Total figures: 13 figures 30

31 SESSION 8 Handout 1. Objective 2: Valuing Business: Other Methods (Overview of some non-npv methods) 1. Earnings capitalization by using P/E ratio 2. Net book value of fixed and current assets 3. Fair value, by individually evaluating each important asset units 4. Comparative value, real market price of similar acquisitions 5. Market value of the company, based on the present share price, or a comparative company s price Example: Earnings capitalization at P/E = 12 = 26.4 at P/E = 16 = 35.2 Net book value 21.0 Fair value 29.0 Comparative value range Market value 35.0 Just for comparison, NPV values at given discount rate of: 12 % % % 27.2 Final deal: 32 million USD cash for the acquisition of the company. 31

32 HOMEWORK 4 Review the Rio Corporation s evaluation in Chapter of the textbook, pages The Student CD contains the Excel file. Let s suppose changes in assumptions in the file and calculate the PV of the company based on that. Team 1: Team 2: Team 3: Team 4: Team 5: the task is to show the basic model in a detailed way. consider a higher rate of sales in the future. Explain the assumption and the changes caused. consider a higher increasement in costs in the future. Explain the assumption and the changes caused. Consider a decreased tax rate in the future. Explain the assumption and the changes caused. Consider a higher WACC (Weighted Average Cost of Capital) from the beginning on. Explain the assumption and the changes caused. 32

33 SESSION 9 Timing: September 8, Friday, a.m. Objectives: 1. Discussion of the homework by teams 2. Working Capital Ratios Resources: Objective 1: Educator s evaluation based on the team s presentation Objective 2: Handouts of the educator Test: No Homework: No (PowerPoint figures) Objective 1: Educator s handout Objective 2: Educator s handout (12 figures) Total pages: 0 pages Total figures: 12 figures 33

34 Session 9. Handout 1. The Business cycle Debtors days Debt is paid Customers become debtors Selling the goods Finishing Cash Business cycle 1. The Start/Finish Surplus Cash Starting Cash Creditor s days Purchase of raw material In-company storage of raw material Payment for material Raw material days Finished goods days Storage of finished goods Finished goods Work in progress days Work in progress 2. Inventory Turnover Days (ITD) Cost Average 365 of goods Inventory sold 3. Decomposition of ITD Decomposition of ITD is based upon the shore of the raw material, work-in-progress and finished goods in the inventory. In this case the calculation of raw material days (RMD), work-in-progress days (WD) and finished gods days (FGD) can be established, as ITD = RMD + WD + FGD. 34

35 4. Debtors (Account Receivable) Days (DD) Average 365 Sales Account Receivable 5. Creditors (Account Payable) Days (CD) Average 365 Purchases Accounts Payable If purchase figure is not available, then non-material costs should be subtracted from the cost of goods sold, then a closing stocks is added and the opening stock is subtracted from the sum. 6. Full Business Cycle Days Full business cycle (FBCD) can be calculated, as: FBCD = ITD + DD Number of business cycles/year is calculated, as: 365 FBCD 35

36 7. Business Cash Cycle Days Business Cash Cycle Days (BCCD) can be calculated, as: BCCD = FBCD CD, that is BCCD = ITD + DD CD However, 1 DD is not equal 1 CD in money terms, the most realistic calculation is, that real creditor s day (RDD) is equal to: CD * Purchases Sales Real ITD (RITD) can be calculated in similar fashion: RITD = ITD * cost gods sales sold In this way the Real Business Cash Cycle Days (RBCCD) can be calculated, as: RBCCD = RITD + DD RCD Number of business cash cycles/year is calculated as: Nominal cash cycles = BCCD Real cash cycles = RBCCD 8. Optimizing the working capital Based on the financial and marketing function of the certain elements of the working capital, the following items should be maximized / minimized: max. Finished goods days (FGD), Account receivable days (DD), and Account payable days (CD) min. Raw material days (RMD), work in progress days (WD) as well as cash and short-term papers stock. 36

37 9. Example Balance Sheet and Income statement of the First United Works is shown below, expressed in million Euro Balance sheet Fixed Assets total: Current Assets: - Inventory: - Raw Material: Work-in-Progress: Finished Goods: Inventory Total: Account receivable: Account receivable: Cash and equivalents: Current Assets Total: Fixed+Current Assets Total: Current Liabilities: - Accounts payable: Bank overdraft: Short-Term Loan: Current Taxation: Current Liabilities Total: Long term liabilities (Debentures): Equity: Common shares (355 th * 1 th parvalue) : Share Premium: Retained earnings : Other items: Equity Total: Liabilities+Equity Total:

38 9.2. Income Statement Sales: - Cost of Goods Sold: - Stocks of Finished Goods - January 1: December 31: Changes in Stocks: Stocks of Raw Material: - January 1: December 31: Changes in Stocks: Stocks of Work-in-Progress: - January 1: December 31: Changes in Stocks: Inventory changes total: Purchases: Factory wages + Social Security: Works overhead: Cost of Goods Sold total (-Changes): Gross profit: Less expenses total: Income before taxation: Tax payment (-extraordinary items): After Tax income: Dividend payment: Retained earnings:

39 9.3. Inventory Turnover Days (ITD) Calculation for Cost 365 of goods Average inventory sold ( ) / 2 = = 97days 1 plus day inventory time costs: /97 = 3.07 Million Euro/day 9.4. Decomposition of ITD Million Euro Proportion % Inventory composition: Raw Material: Work-in-progress: Finished Goods: Total Inventory: (RMD) Raw material days: 97 * 26.6 % = 26 days (WD) Work-in-Progress days: 97 * 18.2 % = 18 days (FGD) Finished Goods: 97 * 55.2 % = 53 days Inventory Total: 97 days 39

40 9.5. Debtors (Account Receivable) Days (DD) Calculation for 2005 Average 365 Sales Account Receivable = ( ) / = 99 days 9.6. Creditors (Account Payable) Days (CD) Calculation for Average 365 Purchases Account Payable ( ) / 2 = = 134 days 9.7. Calculation of the Full Business Cycle Days (FBCD) for FBCD = ITD + DD = = 196 days Number of business cycles/year = = = FBCD 196 times/year 9.8. Calculation of the Business Cash Cycle Days (BCCD) for BCCD = ITD + DD CD BCCD = = 62 days Number of Business Cash Cycles/year = = = 5.88 times/year BCCD 62 40

41 9.9. Calculation of Real Business Cash Cycle Days (RBCCD) for RITD = ITD * cost of goods sales sold = 97 * = 97 * = 78 days RCD = CD * Purchases = 134 * Sales = 134 * = 70 days RBCCD = RITD + DD RITD RBCCD = = 107 days 365 Number of Real Business Cash Cycles/year = = 3.4/times/year Optimization Opportunities for the Company s Working Capital Starting position: Finished goods days (FGD): Account Receivable (DD): Account Payable (CD): Raw material days (RMD): Work-in-Progress days (WD): Cash and short-term papers stock: Business Cash Cycle Days (BCCD): 53 days 99 days 134 days 26 days 18 days 0.4 Million Euro 62 days Opportunity for maximization: FGD: from 53 to 60 days DD: from 99 to 100 days CD: 134 days too, no change suggested Opportunity for minimization: RMD: from 26 to 20 days (better purchase organization) WD: from 18 to 10 days (better organization in the company) Cash level is very low no change suggested New Business Cash Cycle Days: BCCD = FGD + RMD + WD + DD CD = BCCD = 56 days, that is 56/62 = 90 % of the starting phase 6 The 6 days financing means about: * = = 23.3 Million Euro capital savings

42 SESSION 10 Timing: September 8, Friday, a.m. Objectives: 1. Short-term Financial Planning 2. Course overview and examination consultation Resources: Objective 1: Book Ch , 31.2., 31.3., 31.4., Objective 2: Handout of the educator, Consultation Test: No Homework: No (PowerPoint figures) Objective 1: Ch p: (3 pages) Ch p: (7 pages) Ch p: (4 pages) Ch p: (10 pages) Figures: Ch Ch Objective 2: Educator s handout (3 figures) Total pages: 24 pages Total figures: 20 figures 42

43 SESSION 10 handout Objective 2: Course overview and examination consultation Overview of the topics covered 1. The Scope of Corporate Finance. 2. Financial structure of a company 3. Main decision-making steps 4. The financial manager 5. Time Value of Money 6. Net Present Value 7. Annuity and Perpetuity 8. Compound Interest 9. Nominal and Real Rates 10. Investment evaluation by NPV 11. Internal Rate of Return 12. Bond valuation 13. Stock valuation 14. Risk management 15. Portfolio risk 16. Capital Assets Pricing Model 17. Arbitrage Pricing Theory 18. Risk calculation 19. Cost of Equity 20. Cost of Debt 21. Cost of financial distress 22. Optimal debt rate 23. Cost of capital 24. EBIT/EPS analysis 25. EBIT/EPS calculation 26. Financing a company 27. Long-term financing 28. Securities 29. Valuing a business financially 30. Valuing business: Other methods 31. Factors influencing business value 32. Business cycle 33. Working capital ratio 34. Short-term financial planning 43

44 EXAMINATION Examination takes place at University of Zagreb in written form. Examination sheets are provided by the educator. Timing: November, 2006, the exact date and the supervision is to be specified later. Length of the examination: 2 hours. Evaluation: by the educator, according to the Student handbook. Topics: Chapters of the textbook, assigned in the curriculum Parts of the Student CD covered in the class Handouts of the educator Homeworks All the topics that is overviewed during Session